Dotcoms look to the Chancellor

The 2001 Budget, Gordon Brown's curtain-raiser to a near-certain April or May General Election, takes place tomorrow. With a Treasury surplus of up to £18bn in his back pocket, the Chancellor can afford a little prudent generosity. But will his largesse help ebusinesses?

On past performance, the prospects are good. Last year, Brown cut capital gains tax for long-term investors, allowed computer purchases to be written off against tax in a single year, and announced faster work permit authorisation for many categories of IT workers.

Share options - the bone of contention

But dotcoms criticised him for failing to sort out the taxation of share options, extensively used to reward staff.

Companies have particularly suffered where they use unapproved share option schemes, under which the Treasury demands £122 in National Insurance (NI) contributions from every £1000 increase in share value above a £30,000 ceiling.

Last year, provision for payments had to made in the debt-ridden accounts of firms already having to contend with rocketing share prices and minuscule revenues. The problem was highlighted by online auctioneer QXL.com, which this time last year saw its quarterly revenues of £1.6m dwarfed by a £15m provision against potential NI contributions.

What Brown did announce last March was consultation on this complex issue. The £30,000 ceiling on NI-free share options was introduced to penalise fat cats in privatised industries, so it was unlikely to be removed entirely. Instead, the government allowed firms to transfer the NI liability on to employees - cleaning up their accounts, but hardly a delight for the staff concerned.

It has also produced the Social Security Contribution (Share Options) Bill, currently passing through Parliament. When this gains royal assent around Easter, firms will have three months to negotiate their NI liabilities with the Inland Revenue for options granted between April 1999 and May 2000.

NI "out of control"

Several industry figures have said they would still like to see greater simplicity in this area: a QXL spokesman, for example, said the company is still hoping for change. "The NI charge is totally uncontrollable, it goes up and down with the share price," added Andrew Bell, a tax partner at PricewaterhouseCoopers.

As a result of the government's moves to lessen the problem, and the dramatic falls in the stock prices of firms such as QXL, share options are no longer the focus of dotcom hopes for next week's Budget. Instead, ebusiness is looking to the Chancellor to help stimulate investment.

"The dotcom industry has matured and changed quite significantly over the last year, but there is still a prevailing sense of pessimism among venture capitalists regarding investment in startups. It would be a shame to lose the entrepreneurial spirit of the last few years," said Daniel Gestetner, chief executive of comparison site ShopSmart.com. "It is crucial for the government to offer tax incentives to encourage venture capitalists to invest in dotcoms."

Martha Bennett, chief executive of dotcom forum eBusiness Connect, said that small firms could be helped to invest in IT by the corporate equivalent of personal allowances, under which individuals keep several thousand pounds of their income tax free. "Small companies should have a chance to plough earnings back into the business," she explained. "It's expensive for them to build up their IT infrastructure."

The bigger companies could be helped by the expansion of a scheme announced a year ago. Brown introduced a £150m research and development tax credit, under which 150 per cent of research costs can be placed against a company's tax. But this only applies to small and medium-sized companies, said Bell.

"Even if you have an international company with a small research and development operation in the UK, they still won't qualify," he said. The size qualification is based on the company worldwide, discouraging large firms from basing research here.

Sorting out the VAT man

One dotcom is calling for a change in VAT. "At present, the VAT system is idiosyncratic and discriminatory," said Alexander Broich, UK managing director of book and music e-tailer BOL.com. "Books in print are not subject to VAT - rightly so - and yet audio books, or digital downloads, are."

"This is a tax on format rather than product, and VAT should be removed from audio books and digital formats," he added.

Dotcoms are also anxious to see more joined-up thinking when it comes to the government's broader plans for IT. Broich pointed out that German media group Bertelsmann (BOL's owner) offered its staff free computers: a boost to the government's hopes for wider web access, but BOL still had to pay tax on what the Inland Revenue saw as a perk. "We are not looking for the government to contribute to these initiatives, just not to tax them," he explained.

Helga St Blaize, co-founder of IT business-to-business marketplace Acequote, said that she is hoping to see swifter progress in the government's plans to get the public sector online. "The government is consistently failing to deliver online," she said, adding that there have been successes that could be copied.

"Recently we helped some housing authorities source large web-connectivity projects for their tenants - projects which were made possible by recent government legislation. Public sector initiatives such as this provide an incredible boost to the New Economy."

St Blaize also joined Bennett in hoping that the Chancellor will think again on the 1999 Budget's IR35 change to contractors' taxes.

Ebusiness is mainly looking for fine-tuning, rather than major changes, from Brown's speech this week. However, for a government which supposedly supports the New Economy, it's surprising how many times the Chancellor has managed to infuriate IT firms in previous Budgets.

Treat it like any complex financial statement: read the small print.